EUR 850.00 For Business Accounts Only

Morningstar | LXS Updated Forecasts and Estimates from 17 Jul 2018

We think market expectations for no-moat Lanxess were very low going into the first quarter after soft guidance was issued for 2018 with fourth-quarter results. Consequently, the stock was up significantly (around 6%) after reporting first-quarter EBITDA of EUR 375 million, which beat consensus by a modest 4%. Furthermore, 2018 guidance was upgraded to a 5%-10% increase in EBITDA (excluding Arlanxeo), compared with previous guidance for a “slight” increase in EBITDA. In our last note, we argued that 2018 guidance seemed unambitious, given that 2018 will benefit from an extra three-plus months of Chemtura in the comparison. As such, today’s guidance upgrade doesn’t affect our view on the stock, and we don’t expect to make a material change to our EUR 55 fair value estimate. At current levels, the shares are slightly overvalued.

Segment trends were largely unchanged in the quarter, except that negative effects from the depreciating U.S. dollar began to weigh on results. Advanced intermediates continued to be burdened by ongoing weak demand from agricultural customers. EBITDA in specialty additives was up significantly, but this was due to the acquisitions of Chemtura and Solvay’s phosphorous additives. We are optimistic on the engineering materials segment, as it is well positioned to benefit from the metal-replacement trend in automotive markets. Volume growth in the segment remained positive in the quarter at 2% over 2017, with the EBITDA margin increasing 340 basis points from higher plant utilisation. Arlanxeo was the worst performer in the quarter with a 23% drop in EBITDA over 2017 due to ongoing margin pressure in EPDM. We don’t expect Arlanxeo to be a major driver of the stock price going forward. Starting in the second quarter, the division will be reported as discontinued operations.